Preventative care is critical to averting serious (and often costly) emergencies. Just as annual medical exams can help prevent disease, and proactive vehicle maintenance can protect against major automobile repairs, regular check-ups with accountants can help individuals avoid a surprise tax bill and penalties come the April tax-filing deadline.
One benefit of a mid-year tax check-up is to confirm that you are paying the government your fair share of taxes through estimated payments and/or withholding from paychecks in compliance with the U.S.’s pay-as-you-go system of taxation. This is more important than ever in light of the new tax laws that went into effect on Jan. 1, 2018. Some provisions of the Tax Cuts and Jobs Act (TCJA) that affect workers include a reduction in the federal tax rates, a substantial increase in the standard deduction and various modifications to many of the itemized deductions that qualifying taxpayers may have claimed in the past. In addition, the TCJA lowers the corporate tax rate and introduces a complex tax regime for sole proprietors and pass-through business entities.
Following are some considerations individuals should address with their advisors and accountants during a mid-year tax check-up.
I am a Salaried Employee who Receives a W-2
Salaried workers must complete IRS Form W-4 to help their employers calculate how much taxes to withhold from their wages and pay on their behalf directly to the government. The amount withheld will depend on various factors, including the employee’s taxable earnings, marital status, number of dependents, and the credits and deductions to which he or she may be entitled. While a W-4 is required for all new employees, workers can update these forms anytime during a year to reflect changes in their lives, such as a new marriage, a divorce or the birth of a child, which, in turn, may affect their withholding amount.
If you are a salaried employee who also has unearned income from investments, rental property, a second job or other non-wage sources, you may elect to have your employer withhold additional tax from your paycheck to reduce your risk of an unexpected tax bill. However, if your employer withholds too much tax from your paycheck, you may be entitled to a tax refund. As exciting as it may seem to receive money back from the government, you should remember that a refund is essentially a return of the money you willingly loaned to the government, interest-free, the prior year.
I am an Independent Contractor who Receives a 1099
Independent contractors, also called freelancers or gig workers, bear the responsibility for reporting and paying taxes on all income they earn, including earnings received in cash, less any deduction or credits to which they may be entitled.
Under most circumstances, if you qualify as an independent contractor, you should consider pre-paying your self-employment tax, income, Social Security and Medicare tax liabilities by making four quarterly estimated tax payments directly to the IRS in April, June, September and January. Alternatively, if you also have a salaried job, you may elect to update your Form W-4 to have your employer withhold additional tax from your paycheck to account for the untaxed income you earn as an independent contractor.
I am a Self-Employed Owner of a Pass-Through Business
Income earned by pass-through businesses organized as S Corporations, partnerships, LLCs and sole proprietorships typically flows directly from the businesses to their individual owners, who pay the resulting income tax liabilities and self-employment taxes, at their individual income tax rates. However, as a business owner, you may qualify to deduct certain expenses from your gross income and ultimately reduce the amount of tax you owe.
For 2018, the TCJA introduces a new potential tax savings for owners of pass-through businesses in the form of a 20 percent deduction on certain qualified business income (QBI). Meeting the eligibility requirements for this deduction depends on a taxpayer’s line of business, the type and amount of income they earn, as well as the amount of W-2 wages the business pays to employees and the depreciable income-producing property it owns. Due to the complexity of this provision of the new tax law, it behooves owners of pass-through businesses to engage the counsel of professional accountants and tax advisors, in order to develop an appropriate strategy that meets their unique circumstances and maximizes their potential tax savings.
I Itemized Deductions on my 2017 Tax Returns
Because the TCJA nearly doubles the standard deduction for tax years beginning in 2018, it is expected that far fewer taxpayers will itemize their deductions in the future. However, should you continue to itemize, you should be aware that the new law limits, and in some cases eliminates, some of the deductions you may have taken in the past. For example, gone are deductions for moving expenses; fees paid to legal, tax and financial advisors; and theft and casualty losses that occur outside a federal disaster area declared by the president. In addition, there is now a $10,000 limit on the amount of state and local taxes you may deduct on your federal tax returns as well as a cap on the amount of casualty losses you may deduct and the size of a mortgage loan for which you may deduct interest. With these changes in mind, it may make sense for you to meet with a tax advisor who can project whether it makes sense for you to continue itemizing deductions in the future.
Tax reform is a game-changer that can have a significant effect on individuals’ tax bills, especially when considering how they earn wages, the types of income they earn and the way in which they structure any business entities in which they have an ownership interest. If you have not already addressed the impact of tax reform on your situation, you still have time to meet with qualified accountants to put into place an appropriate strategy to maximize tax efficiency for the remainder of the year.
About the Author: Nancy M. Valdes, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with U.S. and foreign-based entrepreneurs and closely held businesses to manage cash flow, protect assets and maintain tax efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
It can be argued that U.S. businesses and their shareholders will be the biggest winners from the Tax Cuts and Jobs Act (TCJA). However, because the law falls short of its aim to simplify the tax code, significant advance planning under the guidance of professional advisors is recommended to help taxpayers dig through the law’s complexity and reap its potential benefits.
One of the most significant provisions of the TCJA is an immediate and permanent reduction in the corporate tax rate from 35 percent to a flat 21 percent and a complete repeal of the corporate alternative minimum tax. This historically low rate takes the U.S. off its perch as the country with the highest corporate tax rate and puts it a more competitive position compared with other advanced economies around the globe.
For businesses organized as pass-through entities, which represent more than 90 percent of all U.S. businesses, the new law is far more complicated. In general, the TCJA introduces a potential 20 percent deduction on certain income that flows from S Corporations, partnerships, LLCs and sole proprietors through to their owners’ individual income tax returns. However, there are a number of limitations and exclusions to this deduction based on such factors as the new concept of qualified business income (QBI), the amount of W-2 wages a business pays and the cost of the depreciable income-producing property owned by the business. Additional limitations apply to “specified service businesses” in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, and financial and brokerage services or any other business whose primary asset is the reputation or skill of its owner or employees. How the IRS will interpret this provision remains to be seen as of today. What is known if that, unlike the corporate tax reduction, the treatment of pass-through businesses, is scheduled to expire in 2025.
With just these provisions in mind, it makes sense for some pass-through businesses to weigh the pros and cons of restructuring as C corporations in the near future. Consideration should be given to such matters as state and local tax liabilities and deductibility, exposure to double taxation and the tax treatment of retained profits and dividends paid to owners and partners of C corporations. If business owners intend to reinvest profits in their companies, a C corporation structure may make the most sense. Alternatively, if businesses intend to pull profits out their companies to distribute them to their owners, a C corporation with double-tax treatment may be more expensive. Based on the taxpayer’s specific and unique facts and circumstances, a conversion may not be the best option for minimizing tax liabilities.
Credits and Deductions
The TCJA provides corporations with a mixed bag of both limited and enhanced credits and deductions that may require careful planning in 2018 to minimize future tax liabilities.
For example, gone are deductions for domestic production activities. In addition, businesses may no longer deduct expenses for entertainment, including costs they incur for seats or suites at entertainment venues, tickets and meals for sporting events and concerts, and dues for membership in in business, recreational and social organizations.
The costs that a taxpayer incurs when treating clients or prospective customers to a business-focused lunch or dinner remains 50 percent deductible, as long as the meal occurs outside of an entertainment facility. Similarly, a company may continue to deduct 50 percent of the reimbursement for meals they provide to traveling employees and 100 percent of costs for a holiday party or similar employee event. However, under tax reform, businesses have until Dec. 31, 2025, to deduct on an annual basis only 50 percent of the costs for meals they provide to their employees for their benefit or in an employer’s on-site cafeteria. Despite these limitations, the law does provide businesses with some enhanced benefits.
Net Operating Losses (NOLs)
Net operating losses are a prime example of the ying and yang of tax reform. While NOL carrybacks areno longer allowed beginning in 2018, unused losses that were previous limited to 20 years of carryforwards are now permitted to be carried forward indefinitely. Yet, only 80 percent of taxable income will be can be offset with an NOL carryforward. As a result, corporations will no longer be able to use NOLs to bring their tax liabilities to zero.
Limitations to Business Interest Deduction
The deduction for business interest, including interest on related-party debt, is limited for certain taxpayers under the new law to 30 percent of earnings before interest taxes, depreciation and amortization (EBITDA) until 2021. At that point, the limitation is set to apply to earnings before interest taxes (EBIT). Any remaining business interest expense that is not allowed as a deduction may be carried forward indefinitely and applied to future tax years. An exception to the 30 percent limitations exists for businesses whose gross receipts for the three most recent tax ears are less than $25 million, as well as for qualifying taxpayers who accrued interest in real property trades or business that elect the slower alternative depreciation system or ADS. Additional guidance on this topic is forthcoming from the IRS.
Limitations to Carried Interest
The TCJA preserves the favorable long-term capital gains treatment of gains from partnership interest held by managers and partners for a share of a business or project’s future profits. Yet, it also limits the benefit to assets held for a minimum of three years, rather than the previous holding period of one year, unless a corporation owns the partnership interest. The new longer holding period applies to capital assets. Curiously, the law does not apply the longer holding period to trade or business assets, also known as Section 1231 assets, which typically include apartments, office buildings and other depreciable property used in a trade or business and held for more than one year. We will watch for additional guidance from the IRS and on this topic.
Expanded Opportunities to Expense Business Assets
One significant bright spot in corporate tax reform deductions is available for businesses that invest in capital assets. For one, qualifying tangible property that businesses acquire and put into service after Sept. 27, 2017, and before Jan. 1, 2023, may be eligible for 100 percent “bonus” depreciation in the year of purchase. The new law defines qualifying property as tangible personal property with a recovery period of 20 years or less and including for the first time used property. Prior to the TCJA, bonus depreciation was limited to 50 percent of the cost of new tangible property or non-structural improvements to the interiors of nonresidential building.
Expanded Definition and Expensing of Section 179 Property
The new law expands the definition of Section 179 qualifying improvement property and business assets to include improvements to nonresidential property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems improvements. In addition, the law increases the maximum amount a taxpayer may expense under Section 179 to $1 million per year. Previously, the Section 179 deduction was limited to $500,000, and it began to phase out at $2 million.
Changes in Accounting Methods
The TCJA qualifies a larger percentage of corporations and partnership to use the cash method of accounting when filing their tax returns, rather than the accrual method, by raising the gross receipts test from $5 million to $25 million over a three-year period. Moreover, taxpayers that meet the average gross receipts test are no longer required to account for inventory using the accrual method. Rather, taxpayers have the option to either treat inventory as non-incidental materials and supplies or rely on the same method of accounting they use for financial statement purposes.
In order for businesses to take advantage of what may be the largest corporate tax cut in history, proper and timely planning is required. The professional advisors with Berkowitz Pollack Brant work with domestic and international businesses to implement tax efficient strategies that comply with complex laws and minimize taxpayer’s liabilities.
About the Author: Laurence Bernstein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax and consulting service to high-net-worth families, entrepreneurs and growth-oriented business owners. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of the law and guidance issued by the Internal Revenue Service.
The Tax Cuts and Jobs Act (TCJA) that the president signed into law in December 2017 calls for the elimination of tax deductions for alimony payments made to a former spouse beginning on Jan. 1, 2019. Similarly, alimony recipients will no longer be required to include those payments as taxable income on their annual tax return filings. The law applies to divorce and legal separation agreements executed after Dec. 31, 2018. Taxpayers with alimony orders in place prior to Dec. 31, 2018, will not be affected, and payors will continue to receive preferential tax treatment for the spousal support they pay. However, it is important to note that the alimony provisions of the TCJA will apply to future modifications of support orders in place prior to Dec. 31, 2018.
The TCJA upends settlement strategies in divorces. Because the individual who pays alimony is traditionally in a higher tax bracket than the alimony recipient, the tax savings on the payor’s deduction is currently worth more than the amount of tax paid by the recipient. Essentially, because each dollar of alimony paid to a recipient costs less to the payor, the payor could afford to pay more in alimony. The elimination of the alimony deduction beginning in 2019, reduces the overall dollars a family has to divide.
This TCJA’s repeal of the alimony tax deduction combined with the law’s temporary through 2025 repeal of dependency exemptions and increase in standard deduction will eliminate the need for divorcing couples to argue over who may claim a dependent child as a deduction in future years. However, it is possible that the new law’s treatment of spousal support will create a sense of urgency for couples, especially high-earning spouses, to expedite a divorce in 2018 and take advantage of the tax break under current law.
As the government works to develop guidance for applying the new tax law, couples considering a divorce should recognize that the entirety of the law is subject to modification and even repeal under a new presidential administration or a change in the congressional majority. As a result, it behooves taxpayers to consult with professional advisors to understand the law in its current state and address in divorce settlements any potential changes that may impact former spouses’ future income and tax liabilities.
About the Author: Sandra Perez, CPA/ABV/CFF, CFE, is director of the Family Law Forensics practice with Berkowitz Pollack Brant, where she works with attorneys and high-net-worth individuals with complex assets to prepare financial affidavits, value business interests, analyze income and net-worth analysis and calculate alimony and child support obligations in all areas of divorce proceedings. She can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email email@example.com.
Information contained in this article is subject to change based on further interpretation of the law and subsequent guidance issued by the Internal Revenue Service.
The Tax Cuts and Jobs Act (TCJA) signed into law in December 2017 expands the benefits of 529 college savings plans to cover private school tuition for children in grades K through 12. Effective Jan.1, 2018, the law allows families the opportunity to fund 529 accounts and take tax-free withdrawals of up to $10,000 per year to pay for a child’s non-college-level private or religious school education. This is a significant development, especially when considering the rising costs of a private school education. In fact, according to the Private School Review, the annual cost to send a child to a private school exceeds the cost of one year’s tuition at an in-state public university.
529 college savings plans have long offered families at all income levels a tax-advantaged planning tool for affording the rising costs of a college education. Parents, grandparents or other individuals may contribute to 529s for the benefit of a young child and allow those dollars to grow tax-deferred for the next 18 years or so. When the child reaches college age, he or she may withdraw funds tax-free to pay for qualifying education expenses, including university tuition, books, computers and room and board.
Individual donors receive the flexibility to fund 529 plans in the manner that is most affordable to them, whether that be small monthly installments or larger annual gifts, free of gift taxes without the imposition of federal taxes on the investment gains. Additionally, donors can avoid federal gift tax on their 529 plan contributions when they give $15,000 or less per year, per beneficiary, or up to $30,000 per year, per beneficiary when donors are a married couple that files joint tax returns.
Under the new legislation, parents or grandparents with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for each of their children or grandchildren in one year with five years of tax-free dollars. For a single taxpayer, the maximum annual lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may contribute up to $150,000 to a 529 plan for each of their children or grandchildren. These contributions are free of gift taxes and can grow over the years free of capital gains taxes. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which is doubled from the current level under the tax reform law to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns. Theoretically, 529 plan beneficiaries may begin withdrawing up to a maximum of $10,000 per year when they turn kindergarten age to pay for schooling at a private institution or religious school and continue to take distributions at these restricted amounts for the next 13 years until they complete high school. At that time, they will be unrestricted in the amount of funds they withdraw each year for qualifying college-level education expenses, including tuitions, fees, room and board.
However, it is important to note that the use of 529 plan savings to pay for a child’s elementary or secondary school education at a private school or religious school is temporary; this benefit is set to expire on Dec. 31, 2025. That gives taxpayers potentially eight years to take advantage of the expanded use of 529 savings. It is critical that individuals meet with qualified advisors and accountants during the first half of 2018 in order to maintain their financial goals and maximize their tax savings in the current year and beyond.
About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she works with individuals and closely held businesses to implement sound strategies that are intended to preserve wealth and improve tax-efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org
The media is rightfully paying significant attention to the U.S.’s new tax laws effective for the 2018 tax year. However, foreign persons with direct or indirect ownership in certain U.S. entities and structures should not forget that they have an important and immediate new filing requirement effective for the 2017 tax-filing season, which begins in January 2018.
For taxable years beginning in 2017, foreign-owned domestic disregarded entities, including single-member limited liability companies (SMLLCs), must 1) maintain a set of permanent financial records, 2) obtain from the Internal Revenue Service (IRS) an employer identification number (EIN), and 3) file both a U.S. corporate income tax return and IRS informational reporting Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code).
Failure to file the return or maintain proper records could result in a penalty of $10,000 for each violation of the law.
Generally, the Internal Revenue Code (IRC) treats SMLLCs as disregarded for all tax purposes. This means that an SMLLC would not have any U.S. income tax or information-reporting requirements separate from its foreign owner. However, under the new rules, such disregarded entities owned by a foreign person are treated as a domestic corporation that must meet all of the reporting and recordkeeping requirements applicable to domestic corporations with foreign owners. This includes filing an income tax return even if the foreign owner is already filing a U.S. tax return to report the SMLLC’s activity. The tax return will provide only general identifying information, but the Form 5472 that must be attached includes disclosure of the SMLLC’s direct and indirect foreign owners and any transactions that occurred between the SMLLC and a related party (including but not limited to the owner). For this purpose, a foreign owner includes a nonresident alien individual, foreign corporation, partnership, trust or estate.
It is likely too late for applicable taxpayers to avoid the domestic disregarded entity filing and recordkeeping requirements in 2017. However, taxpayers do have an immediate opportunity during the first few months of 2018 to plan ahead and change their structures.
For example, an SMLLC may consider electing to be treated as a corporation for U.S. income tax purposes and take advantage of the U.S.’s new corporate income tax rate, which was has been reduced significantly from a high of 35 percent to 21 percent beginning in 2018. While this option may be acceptable and easy for some foreign owners of SMLLCs to do, it is not an ideal solution, since it will not eliminate the tax return filing requirement or, in some instances, the requirement to file Form 5472. In addition, if the SMLLC owns U.S. real property, there may be Foreign Investment in Real Property Tax Act (FIRPTA) issues.
Alternatively, if the SMLLC is owned by a foreign corporation and holds personal use property, the LLC may be liquidated and avoid a U.S. corporate tax return filing requirement going forward until the property is sold. However, this option may also yield future tax implications, including foreign tax consequences, depending on the SMLLCs activities and whether the foreign corporation owns other assets.
Before making any decisions, it is vital that taxpayers engage the expertise of accountants and advisors to conduct a thorough review of their unique circumstances and a careful analysis comparing all of the options available to them.
The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.